The Fruits of Civilization – The Modern World Economy

The Modern World Economy

Industrialization sparked trade. In 1913, on the cusp of the 1st World War, the volume of worldwide foreign trade was over 25 times what it had been in 1800. The period of most rapid growth was from the early 1840s to 1873, when total trade went up over 6% per year: 5 times population growth, and 3 times as fast as production increased.

Migration and foreign investment flowed across borders. By the onset of the 20th century world economy was a meaningful term. At the time, Europe was the epicenter of the international trade gyre.


The emergence of global trade owed to the lowering of natural and man-made barriers to trade.

The natural obstacle was the expense of long-distance transportation, especially on land. This was largely solved by railroads, later complemented by complex networks of roadways. In the latter 19th century ocean-going steamships turned the seas into highways.


Containerization – using standardized containers to haul cargo – greatly raised the efficiency and lowered the cost of transport.

Containers were first applied for coal transport in England, beginning in the late 18th century. By the 1830s, railroads on several continents carried container crates that could be transferred to other transport modes.

Steel begin to replace wood after the 2nd World War. The US military was an early adopter.

Commercial seagoing container transport took off in the 1950s. The first container ships were built in 1951.

Standardization of containers was slow in coming, as the capitalist competitive instinct override more sensible cooperation. International standards were first proposed in 1970, but it was over a decade before they were commonly followed.

In the United States, the Interstate Commerce Commission (ICC) was a major obstacle. The government agency was created in 1887 to keep railroads from monopolist practices but became a captive creature of the industry. Only after deregulation in the 1980s, with the ICC cut out of protecting railroad interests, were standardized containers available for US cross-transport between ships, rail, and trucks.

By 2010, 90% of non-bulk cargo carried by ships worldwide was in portable and stackable containers; yet an inefficient plethora of container standards still exist.


The man-made barrier to trade was governmental interference, most often in the form of tariffs, which raised costs enough to render trade uneconomic.

In the 1860s and 1870s, through a set of negotiated treaties, trade among European nations was as free as it would ever be until after World War 2. In the 1st half of the 1860s, the United States was fighting a Civil War, and so more concerned about embargoes on the enemy than international trade.

There were numerous exceptions to freeing trade. Governments still favored domestic industries which had political clout. Though progress has been made to freer trade, economic corruption by special interests remains pervasive throughout the world to this day.

Agriculture holds a particular place of privilege for protectionism. The governments of the United States and Japan have been especially enthusiastic in their coddling of domestic agricultural producers, though practically every industrialized country has protectionist measures for its favored industries, of which agriculture always ranks high.


Take up the white man’s burden… ~ English writer and poet Rudyard Kipling

As Japan exemplified, countries in the vast continents of Asia and Africa had minimal participation in the economic expansion of the 19th century until forced by aggression from Western powers.

Britain pried open China to trade at the end of the 18th century. Perry’s black ships sailing into Japan’s Yokosuka harbor a half century later was an imitation by America.

By the dawn of the 19th century, China and southeast Asia were cut-up colonies of various Western powers. Japan got into the act in snatching Taiwan and the Korean peninsula from the dying Qing (Manchu) dynasty. Africa was similarly carved up by European powers from 1880.

Prior to industrialization, only South Africa had previously been of interest to foreign powers; first by the Dutch, beginning in the mid-17th century, as a way station between the homeland and Indonesia. The British captured South Africa during the Napoleonic Wars.

Britain’s abolition of slavery in 1834 angered the resident Boer slavers, who were the descendants of Dutch colonists. Whence issued Vryheidsoorloë: the “freedom wars.” The 2 Boer Wars (1880–1881 & 1899–1902), with their scorched-earth policies and death camps, were an exuberant exercise in savagery, and a foreshadowing of the World Wars ahead.

There have been numerous explanations as to economic incentives for imperialism, but all of them bleed out in light of the facts. Imperialism was a political dynamic, not an economic one: a product of aggressive nationalism, which was highly contagious.

From a historical perspective, post-industrial imperialism was simply a repetition of the empire-building upon which civilization itself was founded. A notable difference was the inherent racism in Western powers pillaging nonwhite lands.

The Western intellectual climate in the late 19th century was strongly colored by Social Darwinism. Kipling’s “the lesser breeds without the law” expressed the sense of superiority that stirred the spirits of well-heeled men in the parlors and political circles of Europe and America. To general approval, US President Theodore Roosevelt grandly bandied “manifest destiny” for his foreign forays.

War & Economic Disintegration

Before there were 2 of them, the 1st World War (1914–1918) was known to the millions of Europeans who suffered through it as the Great War. The unsettling aftermath of the “war to end all wars” ensured that there would be another. Germans reparations insisted upon by France instilled a taste for revenge that would only be drowned in more blood.

The toll of the 1st World War was tremendous, and unsurpassed until the 2nd: 10 million combatants killed, and 20 million seriously wounded in WW1; 10 million civilian casualties, and another 20 million died from war-caused famine and disease. All told, over 60 million lives were lost in the Great War.

Most of the material damage – housing, industrial, agricultural, transportation, and communication facilities – occurred in northern France, Belgium, a corner of northeastern Italy, and the battlegrounds of eastern Europe. Central and eastern Europe, effectively economically cut off and disrupted by armies, had its agricultural output drastically curtailed, reducing large areas to famine. At sea, submarine warfare devastated shipping.

Even more damaging was the continuation of economic dysfunction after the war. During the war, governments of every belligerent nation, and even some noncombatants, coerced a controlled economy: wages, prices, allocation of labor, and production we set by governments. These controls artificially stimulated certain sectors while restricting others. Capitalism functionally ceased to exist, though investors continued to profit from workers’ toils.

Although controls were lifted at war’s end, the prior economic ecosystem did not quickly or easily reestablish itself. Income from foreign investments was lost and not recovered. Capital flows that had withered in war did not return.

Trade revived slowly, as the pre-war spirit of free trade was polluted with economic nationalism: the same beggar-thy-neighbor mercantile philosophy of political economy that was practiced 2 centuries earlier was a stumbling block to imports.

Inflation surged throughout the Western world after the Great War. This was, besides sheer shortages, a consequence of trying to paper over sovereign debt incurred during the war. Hanky-panky with the gold standard played a large part.

The Gold Standard

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. ~ Alan Greenspan in 1966

Some economists attribute the economic integration achieved in the 19th century to having an international gold standard. The standard appeared to work quite well from 1870 to the 1st World War, when international trade and capital flows increased with relative economic stability. Others cited the central role of Britain, particularly London, which was on the gold standard. The gold standard was instrumental to the perceptions of moneymen, upon whose confidence the values of currencies relied.

For most of history, money had to be backed by some tangible asset base to hold value, as its worth was otherwise inevitably spoiled by its issuer’s cavalier greed. Owing to the innate risk adversity of humans, the chosen backing asset has typically been the one that loses the least value over time.

Various commodities have served as monetary standards through history, including land, cattle, and wheat; but gold and silver have been most often employed. Gold as money began in Asia Minor thousands of years ago.

In medieval England, the “pound sterling” was legally defined as pound weight of sterling silver, but its coins were relative slivers of silver to their stated value. This was stretched into fantasy in the 1790s, when Britain suffered a silver shortage. The government made do with tokens that it had its citizens consider as silver.

During the Napoleonic Wars (1803–1815), England refused to exchange banknotes for whatever metals were in its vaults. By denying convertibility, the country had fiat money, backed only by the authority of its say-so.

After Napoléon suffered his final defeat, England re-coined its empire, with convertibility between the old and new currencies.

After allowing regional banks leeway in issuing small notes in the 1820s, the Bank of England got a monopoly on money in 1833.

The 1844 Bank Charter Act established that Bank of England notes were fully backed by gold, though the pound was still called “sterling.” The amount of gold that the Bank of England held ostensibly determined the country’s money supply.

Gold flowed in and out of the country as a function of the balance of payments. This caused fluctuations in the total money supply, which in turn moved price levels.

When international gold flows were slight, or inflows and outflows balanced, prices tended to be stable. Conversely, large inflows – as happened with the gold strikes in California and Australia in 1849–1851 – caused inflation, inciting sudden withdrawal from banks, which brought on financial panic.

Fluctuating precious-metal supply was a recurrent problem with metallic monetary standards through history; though, as the pace of trade picked up in modern times, contagions came more quickly and were more profoundly felt.

Numerous countries had tinkered with bimetallic standards. The US tried a gold/silver standard in the early 19th century. A fixed exchange rate proved impractical as metal supply gyration jerked the currency around. American banks suspending payment in silver propelled the country’s 1857 bank panic.

Price stability was hard to come by when the supply of standard metals was volatile. The untoward flutter from the gold strikes inspired France in the 1860s and 1870s to try to create, with other countries’ participation, an alternative money standard. After some success, the relative prices of gold and silver reversed from the discovery of new silver deposits. Rather than suffer the inevitable inflation, France and the others in its currency club fled back to a pure gold standard.

Like Britain during the Napoleonic Wars, governments running deficits repeatedly suspended convertibility in the 19th century.

Toward the end of the 19th century, to attain price stability, several silver-standard countries began to peg their currencies to the gold standards of the United Kingdom or United States. The gold standard reached its zenith in 1913 before crumbling with World War 1.

A run on sterling in England early in the war caused the country to impose exchange controls. This fatally weakened the gold standard. While convertibility was still the legal regime, it was honored in the breach.

Financing the war meant printing money. Drastic inflation followed. Price levels doubled in Britain and the US, tripled in France, and quadrupled in Italy.

At the close of the War the practical monetary solidarity of the world had disappeared, and the overprinting of paper money continued. ~ English historian H.G. Wells

The US was an exception in not suspending the gold standard during the Great War. The newly minted Federal Reserve, which was created in reaction to the Panic of 1907, manipulated the currency market to minimize the impact of gold inflows on the money supply, thereby curtailing inflation.

The ostensibly neutral United States fared better than European countries, which were destroying their capital stock via combat. Hence, when the gold standard was restored after WW1, the US turned from being a net debtor country before the war to a net creditor afterwards.

Post-war, Germany was having an antithetical experience to America. Its inflation fared no worse than France during the war, even though Germany had suspended the gold standard and was simply printing money to fund its war effort. This actually had less economic effect than it might have had otherwise, as Germany had much of its industrial power intact after the war.

But Germany, which lost the war, was forced in the Treaty of Versailles to pay crushing reparations that ensured a crippled economy. That guaranteed hyperinflation, which duly happened. By 1923, the German mark was worthless. The distress of the Germans was worse than it had been during the war.

Further insult to national pride included French and Belgian troops occupying Germany’s industrial heartland to extract payment in goods, such as coal. This set the stage for the rise of Hitler, who promised to restore the nation. However disastrous the outcome, in the early 1930s, after suffering over a decade of ineffective political timidity, the German people understandably looked to a strong leader to bring the country off its knees from the depredations of reparations.

By 1927, most countries had returned to the gold standard. But the nascent pre-war stability had been undermined.

Britain had returned to the gold standard in 1925 under Winston Churchill, then chancellor of the exchequer, by redistributing income at the expense of workers’ well-being. General strikes followed. These were strongly opposed by the government.

Rather than risk civil war, the unions backed down. But the episode sowed a bitter legacy of class division which has persisted to the present day.

In spite of Britain’s travails, much of Europe had recovered by the mid-1920s. 1924 to 1929 seemed a time of normality. Yet the foundation of that prosperity was fragile: heavily dependent, especially in Germany, on continuing US investment, which began to flag in the summer of 1928.

This was the beginning of the end of a speculative boom funded by America. US economic growth slowed after the 1st quarter of 1929. By the end of that summer, Europe was economically strained from cessation of American investments abroad.

Slowdown in the US was apparent in the autumn of 1929; though, with stock prices hitting an all-time high, American investors and politicians paid it little heed. Meantime, Britain, Germany, and Italy were already in the throes of a depression.

Any monetary system in a country with fairly unfettered trade offers the prospect of price instability, as its currency is subject to speculation by well-heeled financial pirates. Metal-standard monies are perhaps more prone, as a government has fewer options in response to an attack, other than to suspend convertibility, and so deny the very foundation upon which the currency is supposedly based.

Speculative attacks in Austria, Germany, and Britain in 1931 succeeded. Germany and Austria adopted exchange controls.

Britain was forced off the gold standard, even with determined assistance from America and France. Returning to fiat money allowed the country to use monetary policy to stimulate the economy. Britain’s currency became a bluster of self-confidence.

Australia and New Zealand had already left the gold standard. Canada soon followed.

Just as the gold standard has been credited in some corners as causative to prosperity at the end of the 19th century, it has conversely been damned as ushering in the Great Depression.

Unlike the gold standard before the 1st World War, the return to the standard after the war proved to have destabilizing consequences. This was largely because countries pursued a gold-exchange standard rather than work together toward price stability. The practice of currency exchange (repatriation) had much to do with how well the gold standard worked.

Contrary to other countries, in the wake of the prolonged economic downturn that came to be called the Great Depression, the US upped its adherence to the gold standard during the 1930s.

Following in the footsteps of President Franklin Delano Roosevelt’s (FDR) early 1933 executive order, the US Gold Reserve Act of 1934 nationalized the entire country’s gold supply. Banks had to turn in all their gold. In return, they got government certificates. American citizens continued to be legally barred from owning gold bars, coins, and certificates until 1975.

The Act also authorized devaluation: raising the price of gold. On 31 January 1934, FDR devalued the dollar 40%. This was an attempt to kick start the economy via currency manipulation, and it was not the last such attempt.

To try to stabilize the dollar, the Federal Reserve, with FDR’s approval, sterilized gold inflows worth $1.3 billion between December 1936 and July 1937. This was done to stem a feared potential for financial speculation, where gold inflows might be suddenly reversed. Price controls were also installed.

The resulting decline in the growth of the monetary base sent bond yields up, raised interest rates, and shut down a nascent recovery. The US economy fell into back into recession in 1937–1938.

The 2nd World War was a reprise of the monetary imbalances that had plagued the 1st World War. After the war, the 44 Allied countries set the world monetary order; its leaders convening under the auspices of the United Nations at Bretton Woods, New Hampshire.

So emerged the Bretton Woods system. Each country adopted a monetary policy that tied its currency to the US dollar. The IMF was charged with tiding countries over by bridging temporary imbalances of payments.

The gold standard was nominally kept, though with no domestic convertibility. In essence, the US dollar replaced the British pound as the key currency.

By the late 1960s, the rise of the Japanese, German, and other European economies left America with a continuing balance-of-payments deficit. The government sought a way to stem the loss of gold from its vault. US gold reserves had fallen to $10 billion in 1971, half of what they were in 1960.

The situation was compounded by policies intended to solve the payments problem, but which made little sense when viewed from the perspectives of American foreign policy or macroeconomic efficacy.

In May 1971, Germany left Bretton Woods, as it had tired of propping up the dollar. This move quickly strengthened its economy. The dollar dropped 7.5% against the Deutsche Mark.

Other countries began to demand redemption of their dollars for gold. On 9 August 1971, Switzerland deserted Bretton Woods. An international monetary crisis lay at America’s doorstep.

On 15 August 1971, on his own accord, President Richard Nixon abandoned the Bretton Woods system by terminating dollar convertibility and depreciating the dollar on foreign exchanges. These steps were quickly followed by higher trade tariffs, and wage and price controls to stem inflation.

The price of gold quickly shot up from $35 an ounce to $800. Nixon’s actions resulted in a decade of the worst inflation that the country had ever suffered, along with economic stagnation. The economic malaise was ably assisted by oil price shocks in 1973 and 1978, courtesy of Saudi Arabia.

Since the early 1970s, the international monetary system has been spun purely from fiat money. Currencies are completely a confidence game, turning international comparisons into national interest rates via government bond markets.

The repeated financial crises since fiat money became the world standard, and government moves to ameliorate or preclude such crises, provide ample illustration that fiat money is the antithesis of stability.

The emergence of fiat money typifies its evolution as an abstraction: becoming more a representation of value than an object of value itself. Owing to sovereign debt and the fickleness of financial speculators, who look solely opportunistically to extract profit, currencies have become an exercise in barely controlled chaos – a product of politically spun perception as much as anything. The volatility of cryptocurrencies, such as bitcoin, illustrates how a fiat currency’s value is nothing more than a social consensus which may be rigged. The price of bitcoin was, in fact, manipulated.

“The trouble with paper money is that it rewards the minority that can manipulate money and makes fools of the generation that has worked and saved.” ~ Adam Smith

Though freed as a monetary base, gold has not lost its allure as a safe haven when currencies look uncertain. The 2008 recession sent gold soaring in price.

Gold reached a record high of $1,895 an ounce on 5 September 2011, at a time of fear that the US government would default on its debt because of a political impasse. After the political shenanigans resolved, gold declined surprisingly swiftly.

Having no yield or earnings, gold is hard to value. Like paper money backed only by a government’s resolve, gold is precious only so long as enough people agree that it is. Money abides as a consensual symbolism.

Though the gold standard has been abandoned, governments still hoard the hoary precious metal. Britain’s governmental gold deposits are on the order of £156 billion ($221.7 billion), while the US retains a measly $11 billion (£7.7 billion).

“We invented money and we use it, yet we cannot understand its laws or control its actions. It has a life of its own.” ~ American author Lionel Trilling

Economic Cycles

Industrialization fundamentally changed the gyre of macroeconomic activity: upping the pace and intensity of economic swings.

In preindustrial times, abrupt price fluctuations were most often local or regional. Bad harvests and war were about the only triggers for economic malaise.

By contrast, industrialization brought monetary concerns to the fore. The sloshes and desiccations of financial flows became quicker and more pronounced, dependent upon the degree of surety that growth was in the offing. The confidence of moneymen determined an economy’s impending prospects.

Expanding trade from industrialization introduced bipolarity into economic cycles. The increasing integration of the international economy brought about by freer trade created a synchroneity of price movements across nations.

In the 19th century, bipolar economic booms and busts marked by stock exchange crashes and bank panics followed one another in pell-mell manner.

In the 1850s, French statistician Clément Juglar was one of the first to scrutinize economic cycles, which he identified as lasting 7–11 years. These Juglar cycles were characterized by oscillations of investment and levels of unemployment.

A new cycle started from the trough of the last, with growing confidence that the worst was over. After 4 or 5 years of rising consumption, investment and production, pessimism set in about the good times continuing. The cycle slowed down and unwound in the following years, ending in a recession or depression, or quickly crashing in a financial panic.

In 1922, Russian economist Nikolai Kondratiev proposed that Western capitalist economies had long-term (50–60 year) cycles of boom followed by depression. These became known as Kondratiev waves.

The next year, English businessman and statistician Joseph Kitchin found evidence of short business cycles of about 40 months. The Kitchin cycle is believed to be related to the time lags associated with information flows affecting business decisions.

The business cycle, as it is commonly called, revolves around manufacturers, businesses, merchants, and consumers. The levels of production and consumption diverge when anticipation in production exceeds demand.

As consensus emerges that such divergence is an untoward harbinger, trouble looms by dint of such pessimism. Investment slows, and with it, employment. With the price mechanism as the only arbiter of manufacture, and acting only as a lagging indicator, never as forward guidance, the business cycle naturally ramps up and runs down.

A distinct financial cycle also exists. The lucre gyre was long considered simply part of the business cycle, but its whirlpool comes from a different school of fish. Moneymen speculate to feed their greed.

Every age has its peculiar folly: some scheme, project, or fantasy which it plunges, spurred on by the love of gain, the necessity of excitement, or the mere force of imitation. ~ Charles Mackay

Whereas businessmen ponder price to suss conditions, financiers fancy risk as their oracle. The prophetic powers of both are often ineffectual, but so it goes, as the market system essentially runs on rumor.

The euphoric episode is protected and sustained by the will of those who are involved in order to justify the circumstances that are making them rich. ~ John Kenneth Galbraith

Animal spirits have a way of feeding a financial beast until it can run no more. Those who grab with the most gusto fall the hardest, while a measure of timidity proves prudent for men who live off monetary currents. Whatever the investment temperament, an ebb tide in the flow of money puts all financial boats in danger of the shoals.

Whereas entrepreneurs and firms profit individually, investors only rise to a feeding frenzy as a herd. While booms slowly build in the financial world, this collective dynamic ensures spectacular busts. This is because producers and consumers both rely upon easy terms of credit: producers to invest for future growth, and consumers to temporarily live beyond their means, and so fuel growth. When lending dries up the economy plummets.

In the US and UK, consumers account for close to 70% of GDP, as compared to 37% for Chinese consumers (a figure which is rising). If consumers in North America and Europe are not happily spending, economies worldwide suffer.

Network Effects

“Network-based propagation is larger than the direct effects of shocks, sometimes by severalfold.” ~ Turkish-born American economist Daron Acemoğlu

The political economy of trade is treacherous. Its benefits are diffuse, but its costs are often concentrated.

Inequality is exacerbated by free trade. While multinational rent-seeking companies prosper, severe unemployment can strike distant regions or labor markets that fail to successfully compete.

Thanks to globalization, modern economies are a web of interrelated activities, both through the supply-to-demand chain and between production/consumption and finance. Economic entanglement has been repeatedly demonstrated, most emphatically by shocks in one sector that ripple into others.

A shift or shock may occur on the demand side or on the supply side. The propagating effects of each differ in vector.

Supply-side shocks propagate downstream toward consumers much more strongly than upstream to producers, as the prices that customers must pay for products from affected firms and industries ratchet upward. Oil supply shocks are exemplary, as are financial crises: when the cost of borrowing jumps or funds are simply unavailable to finance operations.

In contrast, demand-side shocks, such as from imports or government spending, more powerfully propagate upstream, toward suppliers and manufacturers. Demand shocks have little or no effect on prices. Instead, the effects ripple upstream: affected firms or industries adjust their production levels, and their demand of material and labor inputs.

Toward the end of the 20th century, low-cost imports began to flood into the United States from China, owing to that country’s relatively cheap labor and lack of environmental protection. American manufacturers were distressed by this foreign competition, as were workers in affected industries. But that was just the beginning of the network effects. The overall economic impact of China’s burgeoning exports to the US was ~6 times greater than it was to manufacturing alone.

“Relatively small shocks can become magnified.” ~ Daron Acemoğlu

Network effects are not just felt in economic shocks. They can also be the basis for growth, at least until the inevitable shock occurs.

 Wenzhou, China

Wenzhou is a port city on the east coast of China, isolated from the interior by mountains. Its people speak a dialect unintelligible to most outsiders.

Wenzhou’s legacy of separateness is evident in its large Christian community: a result of foreign missionaries in the 19th century. Wenzhou is sometimes called the “Jerusalem of the East.”

After the 1st Opium War (1839–1842), Wenzhou opened as an international trade port, and became one of China’s early bases of industry.

When China began to open itself to private enterprise in the early 1980s, Wenzhou was one of the first to capitalize on the opportunity. Wenzhou became renowned for its aggressive brand of capitalism, and its golden touch.

A tight-knit community, families pooled their cash and organized informal lending societies. With that capital they started small factories, making a dizzying array of products.

Whenever asset prices spiked, Chinese media pointed to speculators from Wenzhou – with reasonable suspicion. Then came the inevitable downturn. China had motored its way past the wake of the 2008 global financial crisis with a flood of cash. In 2011, regulators began to rein in the excesses. Across the nation, lending to small businesses slowed. Stock and property prices dipped.

Wenzhou companies had been counting on a steady flow of financing to fund their bets on stocks and property. The credit crunch put them in dire straits.

The dense web of trust that had winged Wenzhou to wealth turned into bitter liabilities. Large, unlicensed banks collapsed; so too hundreds of firms.

Small business owners reneged on their debts and fled the city. The most desperate dove headfirst off high buildings. For those that hung on, the wave of government regulations and attempts to bring transparency was ill-received.

The government said it was reform. But we wonder if they were just lying to us, getting companies to take our loans to pay back state banks. ~ Wenzhou businessman Fan Lele

7 years on, Wenzhou has been slow to recover; the prevailing mood sober.

“It used to be that Wenzhounese would lend to each other with no questions asked and not even so much as an IOU. It was like a blood bond. This is no more.” ~ Wenzhou business advisor Zhang Xiaoyan


Economic debacles may be classified by their source: market or finance. A market-based recession occurs via an arresting disequilibrium between supply and demand which is reflected in prices. A market recession may evolve through the typical business cycle, come as a consternation in market conditions, or surface from government missteps in fiddling with the gears of an economy.

Market contractions never evolve into depressions, as markets gradually adjust to a new normal via price acclimation. The oil shocks of the 1970s were a sudden spike in petroleum prices which sent economies spiraling down. The recessions following the jolts were short-lived.

Downfalls from financial panics are an altogether distinct species from market contractions.

 Financial Crises

“How much do all those exotic securities, and the institutions that create them, buy them, and sell them, actually contribute to the ‘real’ economy that provides us with goods and services, now and for the future?” ~ American economist Robert Solow

The money parade is solely guided by the expectation of liquidity. Speculators put their money in. When the prospects of getting their money out sour, speculators panic, causing a crash through herd behavior.

“Recurrent descent into insanity is not a wholly attractive feature of capitalism.” ~ John Kenneth Galbraith

Financial transfers are based upon trust rather than exchange of trade. A financial shock stabs sense of surety about liquidity, making lenders and investors skittish. Through the rumor mill by which the wealth herd invariably operates, discombobulation in confidence can linger for extended periods. After all, speculative funds are a surplus for the wealthy who hold a hoard of lucre: better safe than sorry.

Though some financial falls have been short-lived spasms of fright, recessions from pecuniary panics have often had a more crippling impact on the economic gyre than market contractions. A speculative panic is a criticality event that can cascade into a systemic breakdown in money flow, which may create a monetary morass that lingers for years.

In the US, financial crises have occurred in: 1785–1788, 1789–1793, 1796–1799, 1815–1821, 1825–1826, 1837–1843, 1857–1858, 1860–1861, 1869, 1873–1879, 1884, 1890–1891, 1893–1897, 1901, 1907, 1910–1911, 1930–1933, 1937, 1973, 1987–1991, 2001, and 2008–2010. All these plunges stemmed from speculative booms, fueled by intensely concentrated wealth.

By contrast, market contractions transpired in: 1802–1804, 1812, 1822–1823, 1833–1834, 1845–1846, 1853–1854, 1869–1870, 1882–1885, 1902–1904, 1913–1914, 1918–1919, 1920–1921, 1923–1924, 1926–1927, 1945, 1973–1975, 1981–1982.

(These were business-based recessions not caused by political interference. Calamities caused by the government monkeying with interest rates or the money supply, or via trade restrictions, happened in 1807, 1828–1829, 1945, 1949, 1958, 1960–1961, 1969–1970, and 1980.)

Almost all financial crises were assisted by governmental ineptness. Even now, governments simply do not know how to sensibly regulate economic animal spirits, sphincter speculative fever, nor clean up the aftermath mess.

There is an equally important takeaway about the dance between investors and government: that governments have had to regularly intervene in private financial affairs shows how broken the regime of capitalism is, especially its proclivity to concentrate wealth at societal expense.

◊ ◊ ◊

“Indeed, financial crises and bailouts are a regular feature of the market economy.” ~ American economist Joseph Stiglitz

Because they are lynchpins to economic vitality, and so too-big-to-fail, participant financial institutions are bailed out rather than held accountable. Banks take the risk and taxpayers foot the bill when investors’ drunken reverie collapses.

Countries and regions around the world have suffered their own recessionary roller coasters for much the same reasons as the US, as well as being in on the downturns which engulf all. For instance, the Panic of 1825 arose from the Bank of England’s and others’ speculations in Latin America, including a hoax involving the imaginary country of Poyais, perpetrated by Scotsman Gregor MacGregor. The financial contagion spread throughout Europe and to the United States, as well as dunning Latin America.

 The Panic of 1873

The late 1860s were boom years in Europe and the United States. Then came the Panic of 1873.

Railroad construction went bonkers after the American Civil War: 53,000 km of new track was laid across the country between 1868 and 1873. Considerable craze over rails was infused by government grants and subsidies. By 1873 the railroad industry was 2nd only to agriculture in employment.

An abundance of capital created an oversupply, not only of rail, but also factories, docks, and ancillary facilities. The crunch came with realization that investments had been largely sunk with little prospect of profit.

Meanwhile, in 1871, the German Empire decided to cease minting silver coins. This dropped demand for the metal, depressing silver prices.

At the time, America mined much of the world’s silver supply. In response to the German decision, the US, via the Coinage Act of 1873, abandoned silver as a currency medium, settling solely on gold to back its paper money.

The 1873 Act reduced the domestic money supply, which raised interest rates, thus hurting debt holders, notably farmers. The perception of instability this instilled resulted in investors shying away from long-term obligations, especially bonds.

Beginning in September 1873, the inability of investment banks to market bonds set off a chain reaction of bank failures. The New York stock market closed for a time.

Factories laid off workers. The US slipped into depression.

Europe was already suffering from financial disruption. The Vienna Stock Exchange crashed in May 1873 from a speculative bubble, dishonest manipulations, and insolvencies. Bank failures led to lending contraction which brought businesses down.

Trade fell worldwide. Prices drastically dropped in most European countries as demand slackened.

The 1873 depression sparked cries by agricultural and industrial lobbyists for protective tariffs. This provoked a wave of economic nationalism in the US, Canada, France, Germany, and other countries, further depressing trade and economic vigor. In contrast, Britain, Belgium, The Netherlands, and Denmark remained in the free trade bloc.

The depression that began in 1873 lasted in Europe until 1897. The United States recovered enough to have a repeat financial panic and severe depression in 1893, over several of the same causes that befell the economy in 1873, including railroad overbuilding and subsequent bank failures. This came after having less grievous economic conniptions in 1884 and 1890.

Early 20th Century

The decade leading up to the Panic of 1907 was marked by extraordinary liquidity growth. The Klondike and Alaskan gold rushes brought a bounty of hard money into the American economy. Even more gold flowed in from Europe. The US governmental response was the Gold Standard Act of 1900, which officially set gold as the only standard for redeeming paper money, ending the bimetallism of the previous era.

Instead of a steadying hand, the US Treasury needlessly injected liquidity into the banking system, and lowered reserve requirements to virtually zero. These reckless acts fed debt accumulation and speculation.

The Interstate Commerce Commission came into existence in July 1906, with the power to set maximum railroad rates. This prospect softened the stock market, as railroad stocks slid.

In August 1906, Standard Oil was fined $29 million for antitrust violations: a prelude to its breakup. This governmental crimping of unfree enterprise unnerved stock markets further.

These setbacks were slights to what happened next. The financial markets came a cropper from copper.

In 1907, the Heinze brothers – Augustus and Otto – aimed at cornering the market in copper. (Augustus Heinze had been consolidating the copper supply since 1902 through his United Copper company. His brother Otto simply took the idea to its speculative conclusion.) (Cornering the market consists of obtaining sufficient control of a specific commodity, stock, or other asset, to manipulate the market price. There have been many such attempts, in everything from tin to cattle. Very few succeeded.) The Heinzes were abetted by Wall Street banker Charles Morse, who had once successfully cornered the ice market for New York City. Financing was furthered by the Knickerbocker Trust Company, run by Charles Barney.

The problem with the copper cornering scheme was that the Heinze’s lacked sufficient financial backing. Morse cautioned Otto, but Otto made the play anyway. Having misread the market, the share price of United Copper collapsed. Otto Heinze’s failed copper cornering cast a contagion among his financial associates which cascaded, creating widespread panic. Lending quickly dried up, and the economy collapsed. A drawn-out economic malaise ensued, with revival only in 1914, as the Great War got underway.

 War & Business

As long as it does not happen in the immediate vicinity, war is a boon for business.

“War unleashes and accelerates speculative investing to new levels.” ~ American economist Jack Rasmus

In artificially boosting demand and manufacture, wars cut economic contractions short. The panic of 1857 ended with the onset of the Civil War. The 1898 Spanish American War ended the depression of 1893–1898. World Wars 1 and 2 worked similarly on the economic maladies of the day.

Conversely, the end of war invariably spells a decline in production, and so dampens economic activity – except for the losers: those countries that must rebuild. The World Wars also illustrate this effect.


The US Treasury’s inept ad hoc response to financial events in 1907 led to the creation of the Federal Reserve in 1913. Most critically, the Fed was designed to bail out the banking system when it buckled under speculative overload, by providing liquidity to the creators of the collapse.

The Federal Reserve was the 3rd central banking system in US history. The 1st (1791–1811) and 2nd (1817–1836) each had expired after their initial 20-year charters, purely for political reasons.

Politicians were long suspicious of a central bank. This reflected the (correct) belief across the country that wealthy families and large corporations ran the nation.

Struggling with economic stagnation, President Woodrow Wilson managed to get a central bank act passed only by persistence over determined opposition, and considerable compromise on how the system would work.

The Fed faced its first real test in less than a decade of existence. It failed.

Adjusting from wartime production after the Great War shocked the US economy as factories shut down or retooled their production. (Though America did not directly participate in the 1st World War, it provided supplies which fed the conflict.)

The recession that occurred in 1918 was short-lived, followed by a growth spurt. Inflation shot up.

The Fed responded by jerking interest rates up. This caused a sharp but short, deep depression that began in January 1920 and lasted until July 1921.

Once the Fed relaxed its monetary policy, the economy bounced back and birthed the Roaring Twenties, abetted by rolling back income taxes on the wealthy that had been raised during the War.

The entirety of the 1920s was not rip-roaring. There were mild recessions in 1923–1924 and 1926–1927.

The Great Depression

“I am convinced we have now passed the worst, and with continued unity of effort we shall rapidly recover.” ~ US President Herbert Hoover in May 1930

Though the US stock market crash of October 1929 is often pointed to as causing the Great Depression, its roots go much deeper.

With Europe exhausted by the Great War, America emerged the victor. The US bankrolled European recovery while becoming the richest country in the world.

Britain should have done well, but it committed monetary suicide by returning to the gold standard in 1925 at pre-war parity: an anachronist move that led to overvaluation of the pound and a consequent fall in exports.

American exports and surging gold imports fueled massive consumer credit expansion in the 1920s. Cheap and easy credit was available for home loans and all manner of durable goods, such as furniture and appliances.

The US government foolishly fed a booming economy with more liquidity. 1922–1924, the Federal Reserve bloated the money supply while lowering interest rates to 3%. Over a half billion dollars was injected into the US economy just to help Britain return to the gold standard. In 1926, the Fed briefly raised interest rates to counter surging speculation in real estate, but quickly reversed itself. The return to easy-money lubrication was responsive to pleas from European finance officials: the continent was still struggling economically.

American banks expanded their balance sheets nearly 3 times over between 1914 and 1929, from $20.8 billion in 1914 to $58.5 billion in 1929.

Traditional banks had competition. General Motors created a finance subsidiary (GMAC) in 1919 to lend to installment purchasers of cars. (General Motors Acceptance Corporation (GMAC).) GMAC loans went from $25.7 million in 1920 to $400.8 million in 1929: a nearly 16-fold expansion in 9 years.

 The Florida Bubble

The first euphoric bubble to blow and burst in the 1920s was not on Wall Street, but in Florida. Abetted by the fame of Miami Beach as the playground of the rich, a real estate boom was fueled by eager investors who had never even set foot in the state.

Italian businessman and con artist Charles Ponzi, already a convicted forger and larcenist, began a new career selling swampland. The Florida legislature helped by passing laws to support the land boom.

The inevitable collapse came in 1926, as the supply of fresh and gullible buyers dried up. An unusually cold winter in 1925, followed by an extremely hot summer, frightened away many potential investors, having cast doubt on the state’s polished reputation as “heaven on Earth.” There was a futile rush to get out.

At the time, 2 vicious hurricanes from the Caribbean in the autumn of 1926 were held to be at fault for the bust. Thousands were left homeless while thousands more were relieved of their wealth.


The stock market boom preceding the great 1929 crash started in 1924. The rise was at first justified by economic conditions, but in 1927 the mood morphed into a speculative fever.

At its peak, there simply weren’t enough stocks to feed demand. So, more were made, much in the way that funny money would be made out of securities in the 1st decade of the 21st century. Stocks lost touch with tangible valuation (a perennial trend that has never gone out of fashion, as witnessed at the end of the 2010s).

During the spring of 1929 share prices made large leaps, briefly interrupted by profit-taking. The euphoria held for only a short while. By the time the autumn leaves started turning, uncertainty hung in the air.

In early March, respected banker Paul Warburg warned of impending disaster from “unrestrained speculation.” The reaction was vicious. Warburg was held to be obsolete in his views. He was “sandbagging American prosperity.” Quite possibly he was himself short in the market. An overtone of anti-Semitism wafted in the responses.

In September, American economist Roger Babson chimed in with sentiments selfsame to Warburg. Babson warned of a crash that “may be terrific.”

“Factories will shut down. Men will be thrown out of work. The vicious circle will get in full swing and the result will be a serious business depression.” ~ Roger Babson

The great financial houses at the time pounded Babson with grave rebuke. The financial newspaper Barron’s said Babson should not be taken seriously by anyone acquainted with his past forecasts of “notorious inaccuracy.” Nonetheless, Babson’s blast caused a sharp break in the market.

Sensible people thought the boom would be over before the close of 1929, simply because, like other speculative deliriums before it, it was too good to last.

By the time stocks came crashing down, ordinary folk had piled in, trying to get rich quick. Many did so on borrowed money.

Just as speculation was frothing in the spring of 1929, the real economy in the US was slowing down. In March, house building and manufacturing started to slow down. The thunderclap came as a sudden acknowledgement of an already apparent economic trend: that the Roaring Twenties roared no more.

A long-term decline in the prices of agricultural commodities that began in 1925 had greatly reduced the buying power of farmers. This dilemma had been caused by overproduction after the War, as European battlefields gave way once again to cultivation. Mechanization of agriculture – tractors – increased crop productivity, fueling the oversupply.

A collapse in international trade was caused by a downward spiral in demand which had been egged on by governmental policies: most notably Europe’s return to the gold standard, which incurred deflation. This is what prompted Europe to ask the US for more liquidity. Accommodation by the Federal Reserve in 1927 blew the bubble as big as it could be.

The stock market crash started on 24 October 1929. Pauses were brief as the US market plummeted over the next month, then kept stumbling downwards well into 1932.

1st-rate securities fell alongside the fodder. Discrimination went out the door.

From the initial crash to 1935, US stock prices plunged 89%. The fall was repeatedly briefly interrupted by bear-market bounces.

“The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis.” ~ President Herbert Hoover on 26 October 1929

Once the crisis hit, governments in Europe and America made it worse.

“Prosperity cannot be restored by raids upon the public Treasury. The budget should be balanced.” ~ President Hoover

The Tariff Act of 1930, known via its Congressional sponsors as the Smoot-Hawley Act, was signed into law by President Hoover. It raised the average US industrial tariff from 37% to 48%.

The Smoot-Hawley Act was akin to the proverbial straw that broke the camel’s back. It was merely symptomatic of government policies designed to restrict trade and dampen demand.

The Smoot-Hawley Act was of little consequence. It did not spark a trade war. The main reason for collapse in trade after 1929 was a downward spiral in demand, caused by government adherence in capitalist countries to the doctrine of a balanced budget.

“The worldwide deflation of the early 1930s was the result of a monetary contraction transmitted through the international gold standard.” ~ American economist Ben Bernanke & English economic historian Harold James

Clinging to the gold standard meant that governments were afraid to increase the money supply, for fear of compromising the value of their currencies. Credit became scarce: restricting investment, and thereby reducing demand.

“Let me remind you that credit is the lifeblood of business, the lifeblood of prices and jobs.” ~ President Hoover

Disasters among central European banks, partly a legacy of the Great War, had ramifications across the Atlantic. An antiquated and unstable banking system in the United States readily led to bank failures, with a domino effect.

From 1930 to 1933, a series of bank runs and failures closed 1/3rd of US banks. The volume of money in circulation plummeted: the normal flow became a trickle.

The banking crisis quickly spread to Europe. Both domestic and international chains of credit were broken.

Credit dried up. International capital loans fell more than 90%.

The fall scared consumers, causing a rapid decline in production. Businesses had difficulty servicing their debts, and there were no new loans to be had. Thousands of industrial companies were pushed into bankruptcy.

Meanwhile, the Federal Reserve did nothing to prevent the collapse. Treasury Secretary Andrew Mellon believed that weeding out “weak” banks was a harsh but necessary prerequisite to bank system recovery; thus the Fed saw no need to staunch the massive loss of monetary lifeblood.

“All this calls for a re-appraisal of values.” ~ Franklin Roosevelt in 1932, before becoming President

Between 1929 and 1932, US output fell 30%, while employment plummeted 8-fold. The oft-cited figure of 25% peak unemployment is a gross understatement. (US government employment figures have always been fiddled to present a rosy picture, lest the citizenry revolt against the rigged system.) Well over half of American workers were idle.

It was not until 1937 that US output was back where it had been in 1929. Persistent long-term unemployment destroyed the lives of tens of millions.

“Often no one in authority had any positive idea of what to do, and responded to disaster in the policy clichés of balancing budgets, restoring the gold standard, and reducing tariffs.” ~ Charles Kindleberger

Efforts by the government to spark the US economy were often inept, as Roosevelt’s political rhetoric and policies deterred investment confidence in businessmen. Only with the entry of the US into the 2nd World War did the economy revive.

Much of Europe suffered similarly. Unemployment in Germany shot up at a breathtaking rate. The severe economic distress strained the German political system to the breaking point. In 1933, a resolute leader who promised a fresh start – Adolf Hitler – took power.

The Post-War World (After World War 2)

In recovering from the carnage of the 2nd World War, Western Europe experienced a golden age of growth between 1950 and 1970; but its growth rate rapidly diminished in the decades that followed.

US growth following the war was subdued. The public debt incurred during the War was trimmed by policies that engendered pessimism in businessmen, most notably increased corporate taxes.

With high inflation in the years immediately following WW2, the Truman and Eisenhower administrations committed to the cause of sound money through balanced budgets. Events proved that difficult.

Wars both cold and hot further deepened public debt while darkening the private-sector outlook. (The Cold War was costly in maintaining what Eisenhower called “the military-industrial complex.” The hot wars in Korea (1950–1953) and Vietnam (1955–1973) added substantially to the tab.) Being the leader of the ‘free’ world and fighting Communism proved an expensive proposition.

Between 1950 and 1980, the gap between the English-speaking countries that had won the 2nd World War and those that had lost closed rapidly. By the late 1970s, the popular press often denounced the decline of the United States and the success of German and Japanese industry. British GDP per capita fell below the level of Germany, France, Japan, and even Italy.

Neither the state intervention that began during the Depression and grew after WW2, or the economic liberalization of the 1980s, had much to do with relative growth rates. The Germans and Japanese were disciplined, industrious peoples that rapidly rose from the ashes of their militarism spasm. Their resurgence was practically inevitable.


One constant among industrialized, mass-consumption societies is high energy demand. Any threat of disruption in energy supply has immediate consequence.

 Oil Shocks

Industrialized countries remained dependent upon oil as the lubricant for their economic engines. This became prickly as petroleum production peaked for the world’s top producers in the late 1960s and early 1970s.

There was no immediate supply problem, but, given the way that markets work, simply knowing that peak production had arrived put upward pressure on oil prices. Petroleum-rich regions, including Texas, Alaska, Norway, Mexico, Venezuela, and especially the Middle East, reaped a windfall.

Imports of oil began a steep ascent in the US beginning in 1970, when its production peaked. Europe had long been importing much of its petroleum.

 1973 Oil Shock

On 6 October 1973, a coalition of Arab countries, led by Egypt and Syria, jointly launched a surprise attack on Israel. The Egyptians successfully invaded the Israeli-held Sinai Peninsula, while the Syrians made threatening gains with their attack on the Golan Heights.

Within 3 days, the Israelis had pushed their foes back. The war ended on 25 October with a cease-fire, and the Arabs worse off than before.

US and European support for the Israelis in their Yom Kippur War suffered an economic backlash when Middle Eastern oil producers declared an “embargo” against countries allied with Israel, particularly the United States.

The proclamation was more theatrical than real, in Arab rulers wanting to show their people that they were doing something for the beleaguered Palestinians, who had lost their nation-state to the Jews in 1948. Oil supply was not instantly affected, but the economic impact was immediate and severe, as suppliers capitalized on the situation.

The 1973 oil crisis that began in October only lasted until March 1974, but in that time the global price of oil quadrupled: from $3 per barrel to nearly $12. US prices were significantly higher, thanks to oil companies extracting price-gouging profits.

 1973–1975 Recession

All major stock markets had been in bear territory since January 1973, on the heels of the collapse of the Bretton Woods monetary system and abandonment of the gold standard. Compounded by the 1973 oil crisis, the downturn lasted until the close of 1974.

(A bear market is a colloquialism for a general decline in stock prices. By contrast, a bull market is a period of rising stock prices. The terms came into common usage in 1720, at the bursting of the South Sea Bubble.)

The 1973–1975 recession signaled the end of the economic boom following the 2nd World War. It differed from previous recessions in sporting stagflation: high unemployment and high inflation simultaneously.

 1979 Oil Shock

The repressive regime of the Shah of Iran ended in January 1979 with revolutionary rioting that led to the abdication and flight of the corrupt monarch who had been propped up by the US. The Iranian Revolution resulted in an Islamic theocracy at the end of 1979, led by Ayatollah Khomeini.

During that time, Iranian oil output dropped. Global oil supply dipped only 4%, but widespread panic commenced nonetheless.

During 1980, the world price of crude oil doubled, leading to a rerun of the 1973 oil crisis, with long lines at gas stations. There was plenty of oil to go around, but the companies that controlled it maximized their profits at the expense of the societies they served.

Many Americans thought the declared energy shortage was a hoax perpetrated by the oil companies – which is exactly what it was.

(Following the outbreak of the Iran–Iraq War (1980–1988), Iranian oil production practically stopped, and Iraq’s was severely curtailed as well. Despite that, there was no 3rd oil shock, as American oil companies by this time feared political repercussions for manipulating the market yet again.)

With the 1979 oil shock, the world fell again into a stagnation recession. The downturn lasted in the US only until November 1982. Japan pulled out of its tailspin quickly too. But stagflation lingered in the rest of the developed world until at least 1985.


The economic malaise that afflicted the world at the end of the 1970s birthed a reactionary revolution in politics in the US and UK, with Margaret Thatcher in Britain and Ronald Reagan in the United States promising to “roll back the welfare state” that had supposedly sapped the animal spirits of free enterprise. They wistfully wished for a return of the vigor of 19th century capitalism, conveniently forgetting that it was the golden age of robber barons, not public prosperity.

Reagan loosening regulation resulted in a savings and loan (S&L) crisis (1986–1995), where 1/3rd of the 3,234 thrift institutions in the US went bankrupt, owing to incompetence and fraud.

“The banking problems of the ’80s and ’90s came primarily, but not exclusively, from unsound real estate lending.” ~ American economist William Seidman, head of the US agencies tasked with cleaning up the S&L mess through government largesse

Unsound real estate lending would lead to the next severe recession 2 decades later. But before that, 2 asset bubbles were blown and burst.

 Black Monday (19 October 1987)

“People started to understand the interconnectedness of markets around the globe.” ~ American financial analyst Thomas Thrall

Stock prices are driven by expectation. Anticipating recovery from the recession following the 1979 oil shock, the US stock market began an ascent in the summer of 1982. This owed in large measure to the Reagan administration relaxing financial rules and easing antitrust law, as well as generous tax benefits for the wealthy and corporations. Working men and women did not share in this largesse.

“Financial deregulation at this time laid the foundation for the financial system today.” ~ Ha-Joon Chang

The bull market was further fueled by low interest rates and financial shenanigans (hostile takeovers, leveraged buyouts, merger mania, and junk bonds). These myopic practices spelled a reckoning, but it took years for the obvious to become apparent.

The business myth of the moment was that companies could grow exponentially simply by buying each other out. Further, the 1981 introduction of the IBM PC seeded undue optimism that computers might fuel sustained economic growth.

From late 1985 the US economy began slowing from a rapidly growing recovery from the early 1980s recession. With a “soft landing” in sight instead of recession, investor optimism continued to flower.

In August 1987, the Dow (Dow Jones Industrial Average), a US stock market index, was 44% higher than it had been at the end of 1986. Profit-taking ensued. The market began a gradual decline as the scent of uncertainty wafted.

The Arab-led oil cartel (OPEC) was in disunity. The price of crude oil was half of what it had been a year earlier. It looked like that only direction that the oil price was up, and that would spell further slowdown.

On 14 October, a larger-than-expected trade deficit was announced for the US. In response, US Treasury Secretary James Baker stupidly talked tough with trading partners.

On 15–16 October 1987, irascible Iran hit a couple of American-owned ships with missiles. In reaction the next day (17 October), the US stock market fell 4.6%. The UK stock market was closed that Friday because of a severe storm.

“There is so much psychological togetherness that seems to have worked.” ~ Andrew Grove, CEO of Intel Corporation, on the herd mentality of stock traders precipitating the Black Monday crash

On Monday, 19 October 1987, stock markets in the Far East started the world’s day with a plunge. Later that morning, the US retaliated to Iran’s provocation by shelling an Iranian oil platform.

Panic set in. The Dow dropped 22.6% on Black Monday: the single-largest drop in the market’s history.

$500 billion in US market capitalization evaporated: funny money indeed. Other stock markets around the world were similarly affected.

“We believe it is an overreaction.” ~ American business executive John Rolls on 20 October 1987, echoing common reaction by American business leaders

Following the crash, the US government insisted upon a system of circuit breakers to halt trading if stocks started to plummet too quickly. No consideration was given to stemming the irrational exuberance that repeatedly gave rise to market bubbles, such as the one just experienced.

A group of 33 eminent economists from various nations met, and issued a collective prediction in December 1987, that “the next few years could be the most troubled since the 1930s.” Instead, economies were barely affected by Black Monday. Economic growth picked up throughout 1988, with the Dow regaining its pre-crash level in early 1989.

The Fed intervened with massive dollops of liquidity to avert the crash turning into a crisis. Freshly minted Fed chief Alan Greenspan saw no reason that financial conniptions should damage the real economy.

The bull market that followed was led by computer software, then Internet stocks.

“Black Monday didn’t lead to any meaningful reforms.” ~ American financial journalist Dania Henriques

 The Dot-Com Bubble

Personal computers became increasing common in the 1990s, with Microsoft as the dominant software company, by dint of its association with then-behemoth IBM a decade earlier.

While computer hardware was becoming a commodity business, software took the spotlight as the star of the show, with hefty profit margins for those whose programs attained popularity. Companies contended to become the leader in their niche, and so reap the lion’s share of an increasingly profitable industry. Buyouts were common to eliminate smaller competitors.

It took over a decade after the Internet became a public network for large companies to catch on to its potential – existence proof of smug corporate arrogance in an industry that was supposedly stuffed with savvy men. The first wave of patents on Internet technologies was filed in 1993, followed by succeeding waves of increasing sophistication. So too with commercial entities trying to stand out in a growing crowd.

All the early Internet merchants were startups: companies with a nifty idea that managed to get venture capital funding so as to soar above the fluttering flock. Many companies had stock listings shortly after their web sites went up.

The bookseller started in 1994, as did Yahoo!, a search engine and Web portal. 1995 saw the birth of the auction site eBay.

Fed by a drastic reduction in the capital gains tax, the dot-com stock feeding frenzy started in 1997. Established companies could ratchet their stock price simply by prefixing an “e–” to their name or adding “.com” on the end.

Books-a-Million, a large US bookstore chain, saw its stock price soar 1,000% in 1 week after announcing an updated web site in November 1998.

Respected business publications like Forbes and the Wall Street Journal pimped new shiny nothings to a gullible public, despite many of the firms disregard for basic financial or even legal principles. Miniscule companies that had never made any profit sported stratospheric stock prices.

“Get large or get lost” was the wisdom of the day, so tiny companies flush with cash poured money into advertising. 16 dot-com companies shelled out $2 million apiece for 30-second spots during the 2000 Super Bowl. (The Super Bowl is the annual championship game for commercial American football.) By then the bubble was starting to burst. A year later, only 3 dot-coms ponied up for Super Bowl ads.

British startup launched in autumn of 1999, then tore through $188 million in 6 months in a futile attempt to forge a global online fashion store. Boo went bankrupt in May 2000.

The dot-com stock purge was indiscriminate. Sturdy network hardware supplier Cisco saw its stock decline 86% in the rush for the exits.’s stock went from $107 to $7 per share. A decade later it traded at over $500.

 America Online

“One of AOL’s biggest assets is its brand.” ~ American business executive Tim Armstrong, CEO of AOL

America Online (AOL) originated in 1983 and struggled for a decade. Then, in the mid-1990s, it caught on as a consumer Internet access portal. By 1998, half of the US homes with computers were dialing into the Internet via AOL.

AOL had no technological advantage, and no understanding of how to advance from its success. It just happened to be in the right place at the right time, then went about buying up related properties when it could afford to.

In 1999, AOL acquired Netscape, which made the most popular web browser of the time. Nothing profitable came of it.

In January 2000, AOL bought Time Warner for $182 billion, forming AOL Time Warner. The hurrah of the merger was short-lived.

In 2003, Time Warner scratched AOL from its name like it was a bad rash. 6 years later, AOL was sluffed off to fend for itself; leaving as its only reason for continued existence its brand name.


AOL was only the fattest dot-com company that survived the bubble to face inevitable decline. There were others, leaner but not meaner in the marketplace.

Yahoo! was another early Web portal that lost its footing in much the same way that AOL did: lack of vision and sense of reality coupled to not having any technical edge.

Taiwanese-born American entrepreneur Jerry Yang, CEO of Yahoo!, shortsightedly spurned acquisition offers by Microsoft after the dot-com crash, and again in early 2008 (for $44.6 billion; a 61% premium on Yahoo’s stock price at the time). Yahoo! had a presence in advertising services that Microsoft wanted.

Yang was booted out of his post shortly after spurning Microsoft’s generous 2008 offer, whereupon Yahoo! continued its drawn-out demise on its lonesome.

Yahoo! users and consumers were subjected to all the indignities of the digital age. Their emails were illicitly snooped by the government and their accounts hacked. Further, anyone who clicked on a Yahoo!-sponsored ad might be in for an unpleasant surprise, as those had been infected with malware. Yahoo! was less a service provider than a portal of pestilence.

Finally, in 2016, Yahoo! pulled the plug by selling itself to Verizon for $4.83 billion. Its last CEO, Marissa Mayer, having failed at the task of turning the company, threw in the towel. For her pains, after sucking out $161 million for aimlessly running the company for 4 years, Mayer walked away with a $57 million severance package. It was a rich goodbye, altogether typical of executive “golden parachutes.” But the alternative of not selling out would have been further value erosion for shareholders.

Yahoo!’s buyer, Verizon, started life as a Baby Bell when AT&T was insensibly broken up by the US government, rather than rationally regulate the natural monopoly. In the mid-2010s Verizon evolved into a high-tech scavenger with no business sense: buying the decaying husks of AOL and Yahoo!.


“Organize the world’s information and make it universally accessible and useful.” ~ Google mission statement

Google presents a stark contrast to AOL and Yahoo!. Founded by computer scientists Larry Page and Sergey Brin when both were Ph.D. students, Google has been restlessly mercurial in its technological prowess, and amassed an impressive portfolio of patents in the process.

Google started in 1996 as a research project in search engine technology before going commercial in 1998. The company has pulled in plentiful profits peddling advertising, but incessantly dabbles in many leading-edge technologies: most notably artificial intelligence, including driverless cars, and a program that expertly plays Go, a skill hitherto beyond computerization. Google has also grown by strategic acquisition, such as the popular video-sharing site YouTube.


All told, the dot-com crash wiped away $8 trillion of notional wealth; $5 trillion in the US alone. Yet it had scant impact on economies. Awash with cash owing to loose monetary policy, stock markets quickly recovered, and in the process helped blow the bubble that resulted in the 2008 recession.

“The competitiveness problem of the 1980s and early 1990s didn’t really go away. It was just hidden during the bubble years behind a mirage of prosperity, and all the while the country’s industrial base continued to erode.” ~ American business academic Gary Pisano & American businessman Willy Shih


Before continuing economic history, an interlude to introduce the basic concepts behind finance, and so better understand the roots of the economic malaise in which developed economies stewed from 2008 for several years, and which still affect economic dynamics.


“A business that makes nothing but money is a poor kind of business.” ~ Henry Ford in 1914

Industrialization brought the need for capital to the fore. In the century and a half since, making money from money has grown into an industry that dominates developed economies. From a historical perspective, it is as if the cart is the force before the horse.

“The business of corporate America is no longer business – it is finance.” ~ American economic analyst Rana Foroohar

An intertwined network of financial institutions evolved with the expansion of transnational liquidity. Now a global money parade seeks speculative returns instead of investment in real assets. The quick return is prized, the steady cash stream spurned.

“Excess liquidity must be invested somewhere.” ~ Jack Rasmus


Finance evolved from accounting millennia ago: the tracking of goods and other assets, as well as liabilities. The most basic accounting equation, commonly called a balance sheet, balances a ledger of positive and negative economic value.

Assets = Liabilities + Capital

This equation is the basis of double-entry bookkeeping. For every transaction, total credits equal total debits.

Capital is to economics what energy is to physics: the means for productivity. This is the broad thrust of the term capital as used by economists.

For individuals, capital equates to wealth (net worth).

For businesses, capital equals owners’ equity: the owners’ stake in an enterprise. In dissolution, capital amounts to the leftovers after liabilities have been taken care of.

A liability is an obligation or debt that an economic entity has to an outsider. A liability in the present arose from a past event and is expected to be settled in the future by an economic outflow. Liabilities represent a creditor’s claim on a business’ assets.

An asset is an economic resource: anything, tangible or not, owned or controlled that has a positive economic value.

“An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.” ~ International Accounting Standards Board

Intangible assets are nonphysical resources which provide an advantage in doing business. Goodwill/reputation and intellectual property, such as patents, trademarks, and copyrights, may be intangible assets.

Intangible assets are invariably illiquid: there is no quick or easy way to redeem their value. In recent years, investors have increasingly grown skeptical of intangible assets as being worth much.

Employees, which are arguably the most valuable resource any company has, are not considered assets, as only insufficient control can be applied to corporate serfs.


“The process by which banks create money is so simple that the mind is repelled.” ~ John Kenneth Galbraith

In allocating societies’ liquid resources, banks are the special institution at the heart of capitalism. The ostensible task of banks is to profitably find productive uses of capital.

Banking embodies a core contradiction: safety and risk. Depositors expect a safe place to stash their funds and gain some return for doing so. Banks must lend money out to earn a return: a practice with inherent peril.

The art of banking is managing risk. It is a black art, whereupon its weavers often deceive themselves as to the essential alchemy. History has repeatedly shown this to be so.

A bank’s decisions are all atomic: to whom to lend, whereas the fortune of the future is molecular: inextricably bound to economic reactions outside the purview of either lender or borrower. Capitalist economies transact in waves, and banks are caught in those waves, as are all who invest their bank loans.

Whereas customer deposits are liabilities, a bank counts outstanding loans as assets. Unlike other economic institutions, bank assets are only nominally under a bank’s control.

Money is created each time a loan is made. This comes from considering the same money to be in 2 places at once: the bank counting the loan as an asset, while the actual holder of the loaned money spends it. Banks inflate the money supply by lending.

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. Just as taking out a new loan creates money, the repayment of bank loans destroys money. Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.” ~ The Bank of England

Growing the money supply risks inflating the general price level, and vice versa. This is what happened in the run-up to the 2008 recession.

“Money washed through the US economy like water rushing through a broken dam.” ~ US Financial Crisis Inquiry Commission in 2010


Historically, governments have stoked inflation by printing money with no asset backing (such as gold).

Loss of confidence that the money can be redeemed at face value propels hyperinflation: rapid debasement of a currency. Hyperinflation wipes out a currency’s purchasing power.

War presents a risk of hyperinflation as an outcome, especially for the losing side. Among the many historical examples include Confederate dollars toward the end of the US Civil War (1864–1965); French Assignats following the French Revolution (1789–1796), when the post-revolutionary government printed money to prop itself up and finance its worthless wars; and the German mark following World War 1 (1921–1924), when Germany could not repay the reparations debt imposed on it.

As the first user of fiat currency, China has a long history of episodic hyperinflation. The Yuan Dynasty printed massive volumes of money to fund their wars. The resulting hyperinflation facilitated the dynasty’s demise at the hands of a revolution.

The Communist takeover of China in 1949 was partly an outgrowth of hyperinflation caused by the Republic of China (1912–1949), which printed yuan to finance resistance to Japanese occupation, then to fight the communist insurgents who eventually won. The new Communist government staunched the hyperinflation by issuing a new currency, the renminbi.


Today, as ever, monetary dynamics are a crucial aspect of economic stability and growth. But this critical element is largely out of control.

 Tweaking Financial Vitality

Government financial overseers, such as the US Federal Reserve and UK Bank of England, once effectively controlled the money supply. That leverage was lost as cash became less important and credit financial instruments played a larger role in economic affairs. Now regulators are largely relegated to measures that only indirectly affect private financial activity.

Governments nudge short-term lending rates by adjusting the interest rate at which depository institutions, such as banks and credit unions, lend reserve balances to each other overnight on an uncollateralized basis. This is called the federal funds rate in the US.

The major tool used to affect the supply of reserves in the banking system is open-market operations: buying and selling government securities on the open market. Banks with more reserves have money to lend and vice versa.

Financial regulators may also directly lend money to financial institutions at varying rates to affect financial activity. It is a selective succoring of favored financial firms.

“Markets are routinely rigged in favor of the rich.” ~ Ha-Joon Chang

When credit markets are dysfunctional following a financial panic, government overseers selectively buy assets to improve liquidity in credit markets and increase private institution reserves. This is termed quantitative easing (QE), and amounts to bank bailouts at taxpayer expense. QE is intended to boost the volume of money in circulation, and so stimulate spending. Instead, it mostly lines bankers’ pockets.

Equity markets perform much better when interest rates are falling than when they are rising. Taking this into account, the British and American central banks cater to their financial markets: postponing rate increases when market volatility is high, for fear of causing further upset, but responding to high volatility with rate reductions if the risk of overheating the economy is not obvious. This skewed attitude is a basic mechanism by which governments blow big financial bubbles.


In letting money out, such as lending or otherwise investing, banks take risks. While banks exist to manage risk, they often simply stockpile it. This owes to the peculiar nature of bank assets, and to the continual tension between prudence and greed.

While on loan, a bank’s assets are employed elsewhere, albeit supposedly earning a return for the bank. This monetary game of musical chairs is a confidence game: if the music of optimism stops, banks can be caught without a seat.

One party’s asset is the other’s liability. But the yin-yang of financial accounting can be discordant. The dilemma for banks comes in the asymmetry of their assets and liabilities, which are a mirror to the balance sheets of the customers they serve.

The contractual loans a bank has made cannot be instantly altered, but customers can withdraw at any time. Thus, banking is itself risky, though that volatile tinder is lit only when confidence is lost.

When confidence quickly and broadly wanes in an economy, a bank panic inevitably ensues. This often creates a double whammy on banks, as customers withdraw their deposits, and the value of a bank’s riskier assets – bonds, company loans, and mortgages – drop precipitously.

If assets fall below liabilities, a bank is bust. To forestall such failures, banks maintain equity: capital that optimistically offsets any asset plunge.

Keeping capital close at hand is costly. Return on cash is zero. Liquid assets – like government bonds – yield a measly return, which is why they are so liquid: they are relatively risk free.

The low return on safe assets feeds an appetite for risk. This sets up an ongoing tension between stability and profitability, which bank managers are supposed to balance. Their repeated failure to do so lies at the heart of every financial crisis. A simple equation explains this.

Return on Equity (RoE) = Return on Assets (RoA) x Leverage

where: Leverage = Assets / Equity

The concept is straightforward. A bank increases its profit by increasing return on assets (RoA). Maximizing return on equity (RoE) means holding as few low-return, ‘safe’ assets as possible.

When RoA falls for all asset classes, banks have another way to boost RoE: increasing leverage. This is done by placing more bets through lending and investing, sometimes with borrowed funds.

Ramping leverage necessarily amplifies risk, as a bank has less equity to fall back on should it be called on to meet its liabilities: something which can happen on short notice.

RoE is in the bloodstream of every banker as the benchmark of performance. Practically all bank senior staff are rewarded on meeting RoE targets. This ensures maximizing short-term profits at the considerable expense of safety.

In 2007, the biggest banks in America and Britain – Citi and the Royal Bank of Scotland (RBS) – had leverage ratios of 50 when the 2008 financial panic hit. RBS at the time was the largest bank in the world.

A leverage ratio of 50 meant that the banks could absorb only $2 in losses on each $100 of assets. That was skating on thin ice if the volatile and risky mortgage market dropped, which exactly what happened in early 2008.

American Property Bubbles

“Crises and contagion often start in a small way and then move in unpredictable ways.” ~ American financial analyst Chris Zaccarelli

The US has a long history of property manias, including western New York in the 1790s, Alabama 1815–1819, Chicago in the 1930s to 1841, Los Angeles in the 1880s, New York City 1920–1933, and California in the 1970s & 1980s. This fits with the American spirit of speculation.

Though “animal spirits” may animate investors during bubbles, booms are often consistent with reasonable beliefs about the future.

Alabama farmland was a steal until the end of the 1810s. Growing cotton was highly productive there, and cotton prices were surging on demand from British textile manufacturers. In 1817, Alabama acreage sold for ~$35 per acre (2012 dollars): twice the national average for unimproved land. In the next year, prices nearly quadrupled to $134 per acre. Even at that price, land looked like a good buy given going cotton prices.

Recession struck in 1819. Farm prices fell, and leveraged buyers went bust. A prolonged slump followed; by 1850, an acre of Alabama could be bought for $5. However optimism may have been warranted in the mid-1810s, financial carnage resulted in the wake of the Panic of 1819.

A sudden recovery in European agriculture in 1817 led to many bankruptcies and mass unemployment. This sparked the Second Bank of the United States to sharply curtail loans in 1818, leading to the 1819 Panic. The American economy was moribund until 1921: the first major peacetime financial crisis in the country.

The Chicago boom in the 1830s reached greater extremes than Alabama. At the time, access to water was critical to trade. In 1816, it cost as much to porter cargo 30 miles over land as it did to ship it across the Atlantic Ocean. Hence, land near key ports and shipping routes was at a premium.

The Erie Canal led to economic booms around the Great Lakes. Chicago’s proximity to the Mississippi River made it an attractive bet.

In 1830, Chicago land could be had for $800 per acre (2012 dollars). In 6 years, Chicago soil soared to $327,000 per acre, with some plots fetching a cool $1 million.

Tightening international credit conditions led to the Panic of 1837. By 1841, Chicago land prices had retrenched to $38,000 per acre. But that was mostly a product of unpredictability.

Chicago was poised to become an illustrious metropolis: its prospects in the 1830s looked uniquely bright. Chicago prices in 1836 made sense given the defensible view that Chicago land values might rise to be 1/4th of those in New York City. Those who bought Chicago land and held it through the crash prospered over the next 2 decades: average annual returns through to 1856 were ~9%.

Unexpected good news, or a general mood of optimism, often births a bubble. The momentum that blows the bubble typically involves short-sightedness which only becomes clear as such in hindsight.

Alabama’s land rush rested on pricey cotton; but dear cotton led to an explosion in world production. Cotton prices plummeted 50% between 1818 and 1820. American agricultural land experienced an akin boom/bust again in the early 20th century as wheat prices made a similar swing.

Urban real estate is just as vulnerable as farmland. New York City and Chicago boomed in the early 20th century. Real land values leapt by over 50% in NYC during the 1920s, buoyed by high rents and novel high-rise building technology which boosted the earning potential of a single property. Investors were slower to suss skyscrapers’ effect on the supply of real estate. Erecting 50-storey buildings on just half of Chicago’s business district would have generated a 10-fold increase in the city’s 1933 square footage. In practice, it took much less skyscraper construction to send prices tumbling.

The housing bubble in the 1st decade of the 21st century followed the same arc: suburban home prices soared despite America’s almost unlimited capacity to build. Provoked by price, new supply checked the housing spike.

The 2008 Recession

“There appear signs of froth in some local markets where home prices seem to have risen to unsustainable levels.” ~ US Federal Reserve Chairman Alan Greenspan in July 2005

The financial crisis of 2008 was fueled by low interest rates, easily available credit, scant regulation, and toxic mortgages.

“Giving liquidity to bankers is like giving a barrel of beer to a drunk. You know exactly what is going to happen. You just don’t know which wall he is going to choose.” ~ English investment banker Nick Sibley

The bubble began with George W. Bush, whose tax policies as President were a giveaway to the wealthy. 80% of the $3.4 trillion in cumulative tax cuts 2001–2005 freed funds that flowed to investors. $2.6 trillion went into the pockets of those who didn’t need the money. This savings glut spilled into the market.

“This global money parade does not seek long-term investment in real assets that actually produce things of some use, but rather creates short-term paper products that produce no real income stream or jobs, save for financial traders.” ~ Jack Rasmus

The run-up to 2008 was a replay of the savings and loan (S&L) bubble 2 decades earlier, with a twist of financial manipulation that made the consequences much worse, by fraudulently spreading the risk around. As in the S&L episode, the federal government let the bubble be blown, then bailed out the financial industry when it burst.

“Financial firms have become very good at generating high profits for themselves at the cost of creating asset bubbles whose unsustainability they obscure through pooling, structuring, and other techniques. When the bubble bursts, these firms deftly use their economic weight and political influence to secure rescue money and subsidies from the public purse, which then has to be refilled by the general public through tax hikes and spending cuts. This scenario has been repeated dozens of times all over the world in the last 3 decades.” ~ Ha-Joon Chang in 2014


Bank loans pour money into the economy. Economic theory predicts judicious distribution into productive assets, as economic agency is assumed a rational process.

In actuality, money flows to where returns are highest at presumed levels of risk amenable to a borrower. A confluence of greed and fear drive investment, whereas good sense only occasionally kibitzes from the backseat.

“From 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product.” ~ US Financial Crisis Inquiry Commission


The Roaring Twenties has been a reference period for frivolous speculation. The mood leading to 2008 was much the same. But, in terms of magnitude, the 1920s had nothing on the 2000s bubble. Whereas debt-financed spending never exceeded 10% of GDP in the 1920s, it rarely fell below 20% in the decade before the 2008 crash. 1929 US GDP was $101 billion. In 2007, GDP was $1,225 billion (in 1929 dollars).

The key factor in both the Great Depression and Great Recession was the same: the collapse of debt-financed demand.

Housing is far bigger economically than commercial property. Housing starts are a large chunk of the volatile bit of the economy. This means that changes in home investment have a disproportionate impact.

Real estate is also especial sector of the economy because of its connection with finance. Property is debt-ridden, and so banking lending practices and housing activity are inextricably linked. The reason for this liaison is 2-fold: the high price of real property, and the fact that land, and buildings, are the tangible assets which ostensibly hold value, providing lenders with the surest collateral. The psychological cushion that banks feel in lending for real estate inclines them to overindulge: a facile sense of security with systemic implications.

While property can cause crashes, the sector traditionally leads economies out of recession. These extremes illustrate the continuing connection between finance and real estate.

Into the 21st century, the bulk of lending increasingly went into mortgages, feeding inflation in that sector, as more and more money chased after modestly growing housing stocks. This happened in the US, UK, and much of continental Europe. $4 trillion was sunk into new American mortgages 2002–2006. Accelerating a trend that started in the late 1980s, British banks doubled the debt and money poured in the economy from 2000 to 2007.

Only 8% of the trillion pounds that UK banks created went to businesses outside the financial sector, which itself soaked up 32% of the funds. Generating money with money is the purest form of financial bubble blowing. 31% went to residential property, pushing up house prices faster than wages. 20% got lodged in commercial real estate.

The conventional analysis of the mortgage crisis is that poor people were reckless. But it was wealthy and middle-class house flippers and real estate moguls on the make that blew the bubble. When the bubble popped, affluent investors accounted for a disproportionate share of defaults, as they had scant incentive to hold onto their extra properties. By contrast, the share of single-mortgage borrowers who could not keep up with their payments barely budged.


Secured loans supposedly pose less risk to a borrower, but that ignores the systemic hazard of an entire sector crashing; which is what happened. The problem was exacerbated by the way that the loans were managed: bundled into packages as mortgage-backed securities that were sold to investors around the world as low-risk instruments. Trillions of dollars in real estate loans became embedded throughout the financial system.

The securities were supposedly low risk owing to their being bundled. Risk of failure on any one property would have modest impact on the security as a whole.

When bundling began, sellers themselves had no idea how risky the securities might be, as the bundling was haphazard. The contents of these securities were often inscrutable, as repackaging was common, ostensibly to blend the supposed risk of an instrument to a desired degree.

By 2006, banks selling these securities knew that trouble was looming. When an analyst wrote a positive report about mortgage securities in April 2006, the head of due diligence at investment bank Goldman Sachs wrote in an email: “if they only knew.” But they kept on peddling.

After the bubble burst, all of the major US banks settled up with the federal government for the massive fraud they had committed. JP Morgan Chase alone ponied up $13 billion: a fraction of the lucre the bank had made in the long-running scam.

There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red flags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.

“The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.” ~ US Financial Crisis Inquiry Commission

“I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk. But I believed then, as now, that the benefits of broadened home ownership are worth the risk.” ~ Alan Greenspan in September 2007

Mortgages were simply the tip of the iceberg. Consumers had generally gotten in over their heads in debt.

“Household debt soared in the years leading up to the downturn. In advanced economies, during the 5 years preceding 2007, the ratio of household debt to income rose by an average of 39 percentage points, to 138%. The concurrent boom in both house prices and the stock market meant that household debt relative to assets held broadly stable, which masked households’ growing exposure to a sharp fall in asset prices.” ~ IMF

“In the years leading up to the crisis, too many financial institutions, as well as too many households, borrowed to the hilt, leaving them vulnerable to financial distress or ruin if the value of their investments declined even modestly.” ~ US Financial Crisis Inquiry Commission

Interest has to be paid on loans. With debt rising faster than incomes, repayment became too much of a burden for a tiny minority of homeowners: they stopped repaying their mortgage loans in 2005–2006, setting off the crisis.

Banks shortsightedly reacted by limiting new lending to households and businesses. The sudden credit crunch immediately caused an economic seizure. Marginal companies went wobbly, laying off workers.

As house prices declined, households saw their wealth shrink relative to their debt. With less income and more unemployment, consumer-fueled economies rapidly spiraled downward.

As housing prices fell, global investor demand for mortgage-backed securities evaporated. In July 2007, investment bank Bear Sterns announced that 2 of its hedge funds, which were heavily invested in these securities, had imploded. Within 2 months Bear was on its knees, having lost the trust necessary to do business with other banks.

On 14 March 2008, the Federal Reserve Bank of New York agreed to provide a $25 billion short-term liquidity loan to Bear Sterns that the market was refusing. The next day the Fed changed its mind.

On 16 March 2008, JP Morgan Chase bought Bear for $2 a share: less than 7% of its market value 2 days before. In January 2007, before the debacle, Bear’s stock price had been trading at $172 per share.

8 days later, JP Morgan Chase upped its offer to $10 per share, to fend off a class-action lawsuit filed on behalf of Bear Sterns shareholders, and to prevent former employees, many of whom had been compensated in Bear Sterns stock, from leaving for other firms.

Begun in 1850, Lehman Brothers had grown to be the 4th-largest American investment bank. It held a mortgage lender, BNC Mortgage, and was heavily vested in mortgage-backed securities. In August 2007, Lehman shuttered BNC’s doors. By September 2008, Lehman itself was on the ropes: its stock price a tiny fraction of what it had been 2 years earlier. Like Bear Sterns before it, no other financial firm wanted to do business with Lehman Brothers.

No buyer could be found for Lehman. British financial regulators vetoed Barclay Bank’s bid to buy the crippled firm. The US Federal Reserve resisted Bank of America’s request for government backing of its purchase. So, on September 15, Lehman filed for bankruptcy. This event burst the bubble.

Stock market reaction was immediate. The Dow Jones closed down 4.4% that day: the largest drop since the days following the 11 September 2001 terrorist attacks that took down the World Trade Center twin towers in New York City.

October 2008 was a bleak month for stock markets around the world. The Dow dropped 22% from 1 October through 10 October.

To lick their wounds, banks cut lending to the bone, tipping economies in most of the world into recession.


“Markets have become more complex, and institutions – both bank and non-bank entities – are now larger and connected more closely through a complicated set of relationships.” ~ American economist Thomas Hoenig

No bank was unscathed by the crisis. Those most exposed were local and regional institutions that catered to retail customers and offered mortgage loans.

“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity are in a state of shocked disbelief.” ~ Alan Greenspan in January 2009

Malfeasance by the financial sector was nothing to the US government. While Congress was fretting over scraps to help victims of the fiasco, the Federal Reserve secretly provided $7.8 trillion in low-cost loans to the biggest banks between August 2007 and March 2009. Nearly 25% of the profits that the 6 biggest US banks turned during that period owed to Fed largesse. And that was just the start of the “quantitative easing” with which the Federal Reserve greased a trickle-down recovery.

In the wake of the crash, flush with proceeds from taxpayers, behemoth banks got even bigger by buying on the cheap those that stumbled and were not propped up by the government. At the end of 2007, the 3 largest US banks – Bank of America, JP Morgan Chase and Citigroup – collectively held 21% of all American deposits. By the end of 2008 they had gobbled their way to 33%.

“Consolidation is a natural part of credit cycles.” ~ American attorney Sheila Bair, head of the US Federal Deposit Insurance Corporation (FDIC) (2006–2011)

Thus, the largest banks in the US and other countries remained “too big to fail.” In the event of another panic, the government would have to bail them out at taxpayer expense, or the country would face financial meltdown.

“The goal to end too-big-to-fail and protect the American taxpayer by ending bailouts remains just that: only a goal.” ~ Thomas Hoenig, director of the FDIC, in 2016


“It was the failure to properly price risky assets that characterized the crisis.” ~ Alan Greenspan

Subprime loans, although only a tiny fraction of global finance, caused contagious hysteria on the world banking system. Banks rode risk to a tremendous fall, from which recovery got its legs only in 2017, 9 years later. Even then, American wages remained low. The recovery was largely to businesses’ benefit.

“Dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.” ~ US Financial Crisis Inquiry Commission

“The idea that markets are self-regulating received a mortal blow in the recent financial crisis and should be buried once and for all. Markets require other social institutions to support them. In other words, markets do not create, regulate, stabilize, or sustain themselves.” ~ Turkish economist Dani Rodrik

Religious adherents of capitalism refuse to face reality. When markets lurch, as they regularly do, zealots point the finger of failure elsewhere.

“Government policies rewarded shortsighted collective risk-taking and penalized long-term business leadership. The banking crisis should be understood more fundamentally as a government failure than as a market or business failure.” ~ American economist Mark Perry

Blaming government for failing to adequately regulate the financial sector is rich in irony. However true it may be, complaining so is a damning indictment of capitalism: that businessmen must be constantly watched to avoid serious societal dislocation. It is the strongest-possible purely economic argument to abolish capitalism altogether.

“Greed is a timeless and universal component of human nature, and it influences the public sphere at least as much as the private sector.” ~ Mark Perry, who blamed “excessive government protection of creditors” as causing the crisis.

(Perry’s recommended policy solution is the free-market curative for egregious risk-taking: letting the entangled financial sector utterly implode so that it may learn its lesson. This would create the most severe crises imaginable, as shown by government inaction in the wake of bank failures at the onset of the Great Depression. Perry is typical of religious proponents of unfettered markets: studiously ignorant of history and how the financial industry functions.)

Parry has a point. Money buys power in modern democracies, as it has throughout history: governments are ever under the sway of the wealthy.

“Government policies promoting and encouraging speculative forms of investment since the late 1970s have contributed significantly to the excessive concentration of income and wealth that has taken place over the last 3 decades – both in the US and globally.” ~ Jack Rasmus in 2010

However corrupt, plutocratic government is not the source of the problem. The ascription for greed lies with those who commit it, not its permissive facilitator.

“We cannot control ourselves. You have to step in and control Wall Street.” ~ American investment banker John Mack in 2009, in an appeal to financial regulators

“Major financial institutions had shoddy, risky, and deceptive practices. Those institutions deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit rating agencies who had conflicts of interest.” ~ American senator Carl Levin


History has repeatedly shown capitalism to be a deeply flawed economic system. Cyclical problems persist and have only grown in severity as the finance sector has matured, mutating from ersatz resource allocator to defective perpetual-motion machine aimed at artificial profits: making money with money.

“Money was meant to be the neutral agent of commerce. Now it has become the neurotic master.” ~ American economic journalist William Greider


“What we are witnessing, in the broadest sense, is the bankruptcy of modern economics.” ~ American economic journalist Robert Samuelson

In the aftermath of the housing bubble, over 4 million American families lost their homes to foreclosure. Nearly $11 trillion in US household notional wealth vanished. Life savings were swept away.

“The deep recession that began in December 2007, when the economy began to contract, and ended in June 2009, when the economy began to expand again, has had a lasting effect on the labor market.” ~ US Congressional Budget Office

The unemployment rate in the US shot up to 25% after the bubble burst and took the better part of a decade to recover. For young adults trying to enter the labor market, prospects had not been so bleak since the Great Depression.

“Recession-plagued nation demands new bubble to invest in.” ~ satirical newspaper The Onion in 2008


“Financial institutions heighten risks by originating poorly underwritten loans.” ~ 2013 guidance from the US Comptroller of the Currency, Federal Reserve, and Federal Deposit Insurance Corporation

Bank lending was restrained for years after the 2008 financial meltdown, as regulations were put in place to prevent high-risk lending. This changed in 2017 when the Trump administration took power and stripped away post-crisis financial rules.

Lending surged, invigorating the economy. But all was not sanguine under the surface. Unconstrained, the largest banks indulged in leveraged loans which reaped high fees and thereby up-front profits. These loans were to companies on the edge: unable to survive without a massive financial infusion and likely to go under with the next downturn even after receiving funding.

“Over the past 35 years, these are some of the worst underwritten loans.” ~ American bank examiner Timothy Long

The big banks cut their exposure by packaging and selling the leveraged loans to investors – the same practice of offloading risk that led to the 2008 financial meltdown.

“We market them out, and it’s gone.” ~ American banker Brian Moynihan, Bank of America CEO

“Someone’s going to get hurt there.” ~ American banker Jamie Dimon, JP Morgan Chase CEO, on marketing leveraged loans

“We are in the 8th year of a 7-year credit cycle. When things turn, they are going to turn hard.” ~ Timothy Long in early 2019


“Throughout US history, the financial industry has played a major role in creating – and exploiting – economic distress.” ~ American economist Sarah Anderson et al

 Wells Fargo

“Wells Fargo is committed to putting our customers’ interests first 100% of the time.” ~ Wells Fargo

For years, Wells Fargo, one of the world’s largest banks, committed fraud on its customers in many ways. The bank secretly opened accounts and issued credit cards without customer consent. Customers were unknowingly signed up for online banking services with fake email accounts. Victims only found out about sham accounts after they started accumulating fees. All told, Wells Fargo opened over 3.5 million unauthorized bank accounts, and created nearly a million credit cards that went nowhere, but for which customers incurred charges.

Those who took out student loans at Wells Fargo were deprived of the information needed to manage their accounts, and bilked illegal fees. The bank illicitly signed up 490,000 auto-loan customers for insurance they didn’t need. Wells Fargo made tens of thousands of unauthorized changes to mortgage contracts: extending loans by decades, thereby raising the interest that borrowers would have to pay.

“It was like lions hunting zebras. They would look for the weakest, the ones that would put up the least resistance.” ~ former Wells Fargo employee Kevin Pham

“We had customers of all ages, but the elderly ones would at times be targeted, because they don’t ask many questions about fees and such.” ~ former Wells Fargo employee Brandi Baker

Wells Fargo employees felt pressured to commit immoral and illegal acts from the aggressive greed culture honed by company executives for decades. Those who played by the rules and failed to meet unattainable quotas were punished for it.

“If you weren’t willing to engage in these types of illegal practices, they just booted you out the door and replaced you.” ~ American attorney Jonathan Delshad

Some of the deceptions were finally caught by regulators in 2016, and Wells Fargo fined $185 million, which is about how much money the bank makes in a single day.

Wells Fargo chief John Stumpf resigned in the wake of sham-account scandal. Unlike the exotica of previous shenanigans, with their financial complexities, the misdeeds here were straightforward: under intense pressure from management to meet sales goals, employees committed fraud. Stumpf, who was grossly overpaid during his tenure, never took responsibility for the culture he had engendered. (Stumpf’s compensation was partly based upon the fraud his leadership perpetrated: supposed growth that never occurred.)

In 2018–2019 Wells Fargo paid nearly $2 billion in fines and settlements for its misdeeds. Defrauded customers were not given their money back nor the damage to their credit reputation restored.

 Credit Card Companies

“I asked them why my rate was so high, and they couldn’t really tell me. They just give you a lot of non-answers.” ~ American credit card consumer Kelly Dilworth discovering the profit-gouging associated with her Discover credit card

The 2008 financial shock knocked the wind out of the US economy. To put the banks back on their feet, the government bailed them out and kept interest rates at record lows for years so that shell-shocked bankers could reap their profits in a sedate environment.

Feeling the need to show voters that they were not always spineless captives of special interests, Congress passed a law in 2009 that Senator Harry Reid said “stood up to abusive credit card companies,” by restricting fees and limiting rate increases. To compensate, credit card companies jacked their interest rates to usury levels for new customers.

Into 2016, banks borrowed funds from the Fed at less than 1% (annual percentage interest rate (APR)). Then they turn around and charge their new credit card customers 21% or more. To facilitate this extortion, most credit card companies do not tell applicants what their interest rate will be until after a card is issued.

Though US credit card debt climbed to $1 trillion in 2017, the unmitigated greed of credit card companies hurt growth potential. Young people are abandoning credit cards because of their rude rates.

“The industry is very profitable, but prospects for growth are dimming.” ~ American credit card company research analyst David Robertson

When it comes to collecting debts owed, credit card companies are viciously incompetent. According to judges who see their lawsuits, many are filed with erroneous documents, incomplete records, and generic testimony.

“Roughly 90% of the credit card lawsuits are flawed and can’t prove the person owes the debt.” ~ Brooklyn civil court judge Noach Dear, who was overseeing 100 such cases a day in 2012

Lenders try to collect from consumers who owe them nothing, so the companies tack on penalties and interest.

“JP Morgan Chase engaged in fraudulent and unlawful debt-collection practices.” ~ California Attorney General Kamala Harris in 2013

Even when owed, credit card companies fail to follow proper legal procedures. Some falsify credit card statements. These are the same sorts of practices that banks pursued during the mortgage-lending debacle and in its wake.


“The prevailing business culture in the banking industry favours dishonest behavior and undermines the honesty norm.” ~ Swiss economist Alain Cohn et al

Fraud is no irregularity in the modern banking system. Instead, swindling is what financial institutions do as a matter of practice.

In 2015, 4 global banks – JP Morgan Chase, Citicorp, Barclays and Royal Bank of Scotland – pled guilty to conspiracy to manipulate world currencies. This was just one of innumerable instances where banks placed profitability above decency. However stringent government regulations and oversight may be, they are invariably shown to be insufficient.

The only plausible conclusion is that capitalism is inherently dysfunctional by the very greed that propels it. There is another heaping of proof of that shortly. But first, a survey of the fantastic notions propounded by economists.